FOREIGN INVESTMENT: Australia's sovereignty at stake

by Patrick J. Byrne

News Weekly, July 19, 2008

Seismic flaws in the economy could cost Australia its sovereignty and leave the nation beholden to savings-rich nations like China, especially if such countries take a major stake in Australia's industries. Patrick J. Byrne reports.

Under China's "Go Abroad" policy - aimed at securing access to important raw materials, advanced technology and brand names - Australia has suddenly become a major target for Chinese foreign investment.

While total Chinese investment in Australia is still small compared to that of other nations, it went from an annual trickle to $6.8bn last year, to an anticipated $30bn this year. Federal Treasurer Wayne Swan has been approving new Chinese investments in Australia at the rate of one every nine days.

China's portfolio investment is aimed at maximising returns on it massive savings pool, focused on taking only small stakes in foreign companies so as not to arouse too much foreign hostility.

On the other hand, China's direct foreign investment is increasingly aimed at full ownership and control of key strategic minerals and energy resources.

As a result of its unbridled capitalist growth, China has amassed US$1.3 trillion in foreign reserves, while ordinary Chinese have another US$2 trillion sitting in savings accounts earning negative interest.

These funds are now being directed through state-owned enterprises and the new State Investment Company, modelled on Singapore's Temasek Holdings, to investments abroad.

Even before the State Investment Company was declared operational, it had invested US$3bn in the US equity group, Blackstone.

The major investors in Australia have been the China Trust and Investment Company (CITIC) Australia; CITIC Australia Trading, a wholly-owned subsidiary of the CITIC group, one of China's largest state enterprises; and Sinosteel Australia, a wholly-owned subsidiary of Sinosteel Corporation, one of the country's largest state-owned steel-traders.

Australia has traditionally maintained an open policy to foreign investment, which originally came from Britain, then the US, other Western democracies and Japan.

Now, with the rapid growth of oil-rich states, and China and India, major investments can be expected from resource-hungry emerging states that boast huge government-controlled sovereign wealth funds (SWFs). These funds are expected to grow from around US$2-3 trillion today to around US$6-10 trillion over the next five years.

So far, SWF investments have proven to be politically benign, focused on maximising returns.

However, there are concerns that some SWFs are in the hands of dictatorial governments, some fronts for the military, which seriously violate human rights and back other dictatorships rather than supporting the development of democratic states.

There is a real fear that growing SWF nations in the hands of dictatorial governments could wield significant political and strategic influence over nations whose major industries have become heavily dependent on their investments.

The famous American investor and economic commentator, Warren E. Buffett, prophetically warned in Fortune magazine (October 26, 2003) that a country that goes down the road of excessively depending on foreign investment would become a nation of wage-earners rather than capitalists. He said that such a nation risks losing its sovereignty, being "colonised by purchase rather than conquest".

Interestingly, many of the SWF nations - such as Russia and China - have put tight controls on foreign investment in their own strategic industries, and, in China's case, in industries they have mastered and which now have a competitive advantage.

Russia, with its new found oil wealth, recently declared 42 "strategic" sectors - including the nuclear industry, aerospace, armaments industries, oil, gas, fishing and the mass media - in which foreign companies cannot own more than 50 per cent and foreign companies owned by governments cannot own more than a 25 per cent stake.

Investors now have to seek authorisation from a commission made up of economic and security advisors.

China's foreign investment policy has evolved. It has encouraged foreign investment and technology transfer to sectors until the Chinese firms have gained the know-how and the competitive advantage over their foreign competitors.

Under the recently revamped rules, China now restricts or prohibits investment in industries China has already mastered (like toys, furniture, shoes and clothing) or in industries with high usage of resources or energy (like steel, aluminium, paper, cement and other basic industries).

It has shifted its emphasis to quality rather than quantity of investment, with more emphasis on advanced technology and management. It maintains substantial restrictions on publishing, media, market and social research, and an absolute prohibition on investment in real estate and real estate brokerage firms.

Earlier this year, Treasurer Swan said on a visit to China that Australia's foreign investment policy was non-discriminatory and aimed at having decisions driven by market forces - not external political or strategic considerations.

However, recently, Mr Swan imposed a 90-day review on the attempted takeover of mining company Murchison Metals by Sinosteel Australia. Reports around Canberra suggest that the Commonwealth Government has told Chinese investors to delay takeover applications while it considers whether it wants SWFs to control a large slice of the nation's resource base.

Australia reviewed its foreign investment rules on SWFs only six months ago. Clearly, that review was not enough. According to a federal parliamentary briefing paper on the issue, SWF applications for investment would be reviewed around "the question of how far the commercial agency of any foreign government operates independently and commercially and suggest if a proposal from a SWF is consistent with Australia's national interest." ("Foreign investment rules and sovereign wealth funds", Parliamentary Library, June 24, 2008). The emphasis is theirs.

Clearly, the new rules are inadequate to deal with the magnitude of the problem now facing Australia.

Any one SWF investment is unlikely to pose a threat to Australia. However, a string of major investments over some years by one nation may collectively pose a major threat to Australia's national interest.

The problem is caused only partly by an exuberant China acting in its national interest. A major factor, however, is Australia's over-reliance on foreign investment, resulting from seismic structural flaws that have been allowed to develop in the Australian economy over the past three decades - particularly a mounting foreign debt and misdirected national savings.

Australia faces a horror scenario. The Australian dollar has been rising, due to high world demand for our commodities. When world supplies eventually catch up with world demand, possibly in three to five years, then the Australian dollar could well fall below US40¢, which could well cause a run on the currency and a flight of capital.

At that point, huge SWF nations like China, wishing to consolidate control of their resource supplies, may offer to bail out Australia. But the cost will likely be that China takes control over large slabs of Australia's minerals and energy sectors, and perhaps our banks and retail sectors. Then China would be able to name its own price on commodities like iron ore and other minerals.

If China moved in this fashion, then other nations wanting Australia's resources, like Japan and Indian, are likely to compete with China in the takeover process.

At this point, Australia would have lost its sovereignty.

Putting stronger foreign investment rules in place is a necessary but only partial fix.

Australia has to expand its national savings. Then the government has to mobilise its own sovereign wealth funds, the $1 trillion in superannuation and other savings to bring down our foreign debt and to invest in the massive development of Australia's natural resources so as to keep majority ownership in Australian hands.

It is vital for Australia to engage and supply nations like China and India, but on our own terms.

Australia needs to follow the advice of one senior Chinese official, who, in commenting on his own country's restrictive foreign investment policy, said: "China intends to use foreign investment rather than be used by foreign investors." (China Law Blog, November 12, 2007).

- Patrick J. Byrne is national vice-president of the National Civic Council. This piece is an expanded version of his article that appeared in the printed News Weekly.